SMEs hit by 20% spike in insolvencies after Carillion

The Carillion crisis prompted a 20% spike in companies going insolvent in the construction industry from January to March.

SMEs bore the brunt of the “shockwaves” that the outsourcer’s liquidation sent through the construction industry in January, as many relied on it for work, according to a report.

A total of 780 construction companies fell into insolvency following Carillion’s collapse in the first quarter of 2018, up 20% from 652 in the fourth quarter of 2017, said accounting company Moore Stephens.

There were eventually 2,764 insolvencies among building companies in 2017-18, up 6% from 2,698 the previous year, it said.

The situation has been aggravated by “endemic late payment problems” and bad debts increasing, it said, leaving small suppliers powerless to negotiate against their bigger clients.

Carillion’s payment terms allowed 120 days to pay suppliers, with an ‘early payment facility’ that allowed suppliers faster payments if they would accept less than the full amount owed.

Lee Causer, partner at Moore Stephens said: “The collapse of Carillion sent shockwaves through the construction sector, and we are seeing more insolvencies as a direct result.

“Large construction companies are infamous for squeezing the profit margins of the contractors and subcontractors who work for them. These contractors often cannot negotiate against the terms set for them by their larger clients.

“SMEs and specialist subcontractors have been hit particularly hard by Carillion’s fall, as many of them will have relied on the giant for significant amounts of their work. It is also likely that these subcontractors would have had to write off virtually everything owed to them by Carillion.”

Causer added: “Payment delays should not be allowed to become any worse for construction companies. High import costs and rising costs of materials, added to the huge disruption caused by Carillion, are also exacerbating the difficult climate currently being experienced by the construction sector.”

Meanwhile, the government has called for a review of the auditing industry, after its role in the collapse of both Carillion and retailer BHS has brought significant issues with the sector to light, according to business secretary Greg Clark.

Speaking to the Financial Times, Clark said: “It’s right to learn the lessons and apply them without delay.”

He has asked Andrew Tyrie, head of the Competition and Markets Authority, to scrutinise competition in the industry, while John Kingman, chairman of Legal & general, will look at how to tackle conflict of interest issues.

One solution could be a rule that the auditors of large listed companies be appointed by a public body, it was reported.

Clark said he wanted to look at the results of both inquiries, with a view to introducing new legislation based on their conclusions if necessary.

“There are questions about the competitiveness of the audit market and there are questions about conflicts of interests,” he said.